Advisors Weigh Retirement Savings Options

Getting Americans to save for retirement is difficult, but getting financial advisors and experts to weigh in on the best ways to save isn’t.

Following a story earlier this week on President Obama’s proposal to automatically enroll workers in individual retirement accounts to boost savings among Americans, the discussion board on our sites started heating up as advisors, experts, and readers shared with us the best way to spur savings.

Advisors said that if they were President they’d use simpler options, a government matching program and more liquid plans to increase retirement savings.

Tad Borek of Borek Financial Management said if he was in charge he’d abolish all the retirement plans and come up with one simple option, a Roth IRA and a traditional IRA, instead of having different tax codes, matching contributions and contribution levels, which make figuring out how to save so complicated.

“It’s so silly to have a 403(b), a 401(k), a traditional IRA, a Roth IRA, a SEP-IRA, a Simple IRA, and a 457,” he said. “And these are just the common ones. Then there are the 409(a) plans, the defined contribution benefit plans, traditional pensions, and Keogh/profit sharing plans.”

By making retirement plans simpler, it also makes them cheaper for employers to offer. This is especially important at a time when savings rates have tumbled. Last month Cogent Research released its 2010 Investor Brandscape report, which showed that the proportion of investors holding a 401(k) plan has gone down significantly.

As of October, only 59% of investors’ surveyed held an employee-sponsored retirement account, down from 70% in October 2008.

But ultimately, it’s up to individuals to save, Borek said: “If they don’t they will lead a sparse retirement.”

W. Christopher Maxwell, a managing partner at the Rock Hall, Md., wealth management firm Conestoga Capital Advisors LLC, said the underlying reason why Americans don’t save for retirement is because they don’t believe they have enough to live on.

The solution, he said, is to start a government matching program. “If retirement savings is an important part of national policy than why don’t we say that the government will match the first 2% of what an employee contributes,” Maxwell said. “If the employee puts in 2%, the employer puts in 2% and the government puts in 2% that would make the program a lot more encouraging for everyone to go along with. All interested parties need to have skin in the game.”

Readers chimed in on the discussion boards, too. One reader said that “most people don’t need money sitting in Roth IRAs. They need liquid, safe savings. Once a family has a good emergency account (I recommend 6 months of gross income), then they have permission to lock their money up in a retirement account.”

Meanwhile, another reader wanted to see Roth IRAs expanded to include a combined retirement savings plan, a health savings account, a 529 college savings plan and a home down payment savings.

As it stands, Obama’s proposal, which is part of the 2011 budget proposal, would automatically deduct up to 3% of an employee’s salary straight from their paycheck and invest it in Roth IRAs, unless the employee chose to opt out, or chose to invest in a traditional IRA. This plan would be for employees who don’t have other types of pensions or retirement savings plans, about 80 million workers in all.

David John, a senior fellow at the Heritage Foundation, a conservative think tank, and managing director at the Retirement Security Project, said in a phone interview this week that with the traditional pension system disappearing, retirement savings has become even more critical.

“Unless you’re a career minimum wage worker social security doesn’t provide a level of income that’s sufficient. So either we can make it easier for people to save for retirement from the day they start to work until the day they retire or we’ll have millions of Americans who are poverty stricken in retirement.”